SEC v. Ramy El-Batrawi, et al., United States District Court for the Central District of California, Case No 2:-06-cv-02247-(MRP)(RZ)

The Securities and Exchange Commission today filed a complaint in the United States District Court for the Central District of California charging Ramy El-Batrawi, Adnan Khashoggi, and others with orchestrating a scheme to manipulate the stock price of GenesisIntermedia, Inc. (GENI), a now-defunct public company that was based in Van Nuys, California. The Commission alleges that the scheme, which occurred between September 1999 and September 2001, resulted in the misappropriation of more than $130 million, the collapse of several broker-dealers, and the largest bailout in the history of the Securities Investor Protection Corporation.

According to the complaint, Ramy El-Batrawi, GENI's Chief Executive Officer at the time, and Adnan Khashoggi, with the assistance of Richard J. Evangelista, Wayne Breedon, and Kenneth P. D'Angelo (a stock loan broker previously charged by the SEC and criminal authorities), developed a manipulation scheme by which they could profit from lending GENI shares (rather than selling them). The complaint alleges that El-Batrawi and Khashoggi, through an offshore entity called Ultimate Holdings, loaned approximately 15 million shares of GENI stock to Evangelista's employer at the time, Native Nations Securities, a New Jersey broker-dealer, and more than a dozen other broker-dealers in exchange for cash based upon the market value of the shares.

According to the complaint, Ultimate Holdings loaned stock through Native Nations (and other broker-dealers) to Breedon's employer at the time, Deutsche Bank Securities Limited in Canada, and received the current market value of the stock in cash. As GENI's stock price fluctuated, the loaned stock was marked-to-market by the broker-dealers. Ultimate Holdings received additional cash when GENI's price increased, and was obligated to return cash when the stock price dropped. By lending the shares in this manner, El-Batrawi and Khashoggi raised approximately $130 million without giving up control of the stock or depressing the market price for the stock.

The complaint also alleges that the defendants inflated GENI's stock price by systematically engaging in fraudulent and deceptive practices that had the intended effect of generating additional cash proceeds from the broker-dealers participating in the stock loan transactions. Their illegal manipulative activities included reducing the supply of GENI stock to control the public float, promoting a short squeeze without disclosing to GENI shareholders that El-Batrawi and Ultimate Holdings had effectively already sold their stock through the stock loans and were attempting to prevent their stock loans from unraveling, and making trades through nominee accounts. The complaint alleges that while these activities were ongoing, El-Batrawi also was secretly compensating Courtney Smith, a well-known financial commentator, to tout GENI on television to create demand for the stock, and, in conjunction with Douglas Jacobson, GENI's chief financial officer at the time, was making false and misleading statements in periodic reports filed with the Commission.

The manipulation caused GENI's stock price to increase approximately 1,400%, from a low of $1.67 per share (split adjusted) on September 1, 1999 to a high of $25 per share on June 29, 2001. After the scheme collapsed in September 2001, GENI's stock price plunged to pennies per share. El-Batrawi and Ultimate Holdings then defaulted on their obligations to repay the approximately $130 million they had obtained from the stock loans, which caused several of the broker-dealers in the stock loan chain to go bankrupt.

The Commission charged El-Batrawi, Khashoggi, Ultimate Holdings, Evangelista, and Breedon with violating the antifraud provisions of the federal securities laws, specifically Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act, in connection with the stock loan and manipulation scheme. The Commission also charged GENI, El-Batrawi, and Jacobson with violating these antifraud provisions by making false and misleading statements and material omissions in GENI's filings with the Commission; charged GENI with violating the reporting and books and records provisions of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13; and charged El-Batrawi and Jacobson with violating Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 and aiding and abetting GENI's violations of the reporting and books and records provisions. The Commission further charged Ultimate Holdings with making false or misleading statements in certain filings with the Commission, in violation of Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2. As relief, the Commission is seeking permanent injunctions against all defendants, an accounting of the money that defendants obtained as a result of their illegal conduct, disgorgement (with prejudgment interest), and civil penalties. The Commission is also seeking to bar El-Batrawi, Jacobson, and Khashoggi from serving as officers or directors of a public company.

The Commission acknowledges the cooperation of the United States Attorney's Office for the Central District of California and the Federal Bureau of Investigation in this matter.